How much should you invest, what crypto should you buy, where should you safely store it? You might feel overwhelmed by all the options, and concerned about the potential pitfalls, but it should help to realise that they all boil down to understanding and mitigating risk; from a purely financial perspective, as well as the risks from a security point of view.
Begin with realistic expectations
If you are thinking about investing in crypto, your inspiration might well have been a friend, colleague, or social media notification, describing massive gains made buying early into some exotic animal-based meme coin, that they are convinced are going all the way to the moon.
Well crypto is as much of a jungle as it might sound, so our first recommendation is that you park the spaceship, and start your crypto journey with your feet firmly planted on the ground, and unrealistic expectations in check.
Yes, there are plenty of people who have made life-changing sums investing in crypto, but that is likely because some, or all, of the following apply:
they invested very early
they started with a significant initial investment
they already had experience investing in volatile assets
they did insane amounts of research & understand the technology
they were lucky enough to be in the right place at the right time
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Though many analysts feel that the crypto sector as a whole is still in its infancy, it is probably fair to say that if you are reading this article, most of the above don’t apply to you (yet).
Unless you have a spare flux capacitor lying around, you cannot turn back time, nor can you directly influence fortune, though landing on this page, could well be considered to be in the right place at the right time.
What is within your control is how much effort you make in understanding what you are getting into, so don’t expect to go away with a crypto investment plan on a page - there will be homework set from the NGRAVE Academy.
The majority of recent crypto investors will have made very modest returns, and a significant number will have jumped in, without knowing what they are doing and got rekt - crypto speak for losing everything. And those stories of fantastic gains, well those that are actually true, should simply be regarded as crypto’s lucky lottery winners.
If you want advice for sensible and safe crypto investing that doesn’t rely on a Powerball Win, start with your feet and focus on the ground - rather the moon. With your expectations back on Earth, we can think about the first practical step, which is deciding how much you should consider investing in crypto.
Don’t invest what you can’t afford to lose
The key phrase to understand when deciding how much to invest is something called discretionary income. This is the amount of income you have left over after all your fixed monthly commitments have been accounted for. This must be money you can afford to lose and not incur debts, or any material impact on the essentials of your day-to-day living.
You should only consider investing from your discretionary income. If you already have a large lump sum to invest from savings or inheritance - which doesn’t involve taking on debt or leverage - then you should only consider crypto as one element in a wider balanced portfolio that will include less riskier investments - such as share ETFs or mutual funds - because you have to understand that investing in crypto carries considerable risk.
Not only are cryptocurrencies very new technologies, they also happen to be a direct challenge to the authority of governments. That creates enormous uncertainty around future adoption and potential value, in the context of a time of great economic uncertainty for a host of other reasons (not least the Covid Pandemic). That uncertainty translates into extreme short-term volatility and longer term risk that your investment will lose value over time. So never invest what you can’t afford to lose.
Start by investing in crypto Blue Chips
Saying that crypto is inherently risky is a generalisation, because just as you can define a portfolio of investment categories with a range of risk, with crypto being at the extreme, you can categorise crypto into a risk spectrum.
Bitcoin and Ethereum can be considered crypto’s blue-chips - the term given to established and trusted publicly traded companies tracked by the Dow Jones Industrial Average or FTSE 100 Index. They have the longest track-record of proven and effective technologies, with large enough user bases to create network effects which are very hard to disrupt. For that reason, they are the most sensible place to start investing in crypto.
Neither guarantee a future return on your investment, but the table below shows you historically how they have performed. For newcomers, they should form the majority of your initial investment:
Follow a Cost Averaging strategy
If you have done enough research, and feel that Bitcoin and Ethereum will continue to increase in price over the long term, you face the difficult task of choosing the right time to pull the trigger on your first investment, given short-term volatility.
Interpreting short-term market behaviour isn’t an exact science. There are many schools of thought around what exactly drives short term price movement, which focus on different aspects of technical analysis - interpreting price movement, chart patterns and volume - as well as analysing actual transactions and segment behaviour - known as on-chain analytics.
It is totally unrealistic for you as a novice crypto investor to wrap your head around those concepts, but luckily there is a sensible and simple investment strategy to get you started, called Cost Averaging.
Cost Averaging simply means making regular, recurring purchases of equal value spread over time, instead of one lump sum investment. This approach will allow you to average out the short-term volatility, and if your overall premise is correct, build a net-positive investment over time.
The benefits of Cost Averaging
Simple strategy that can be automated at most exchanges
Removes the stress & uncertainty of timing purchases
Has proven successful in the long run for Bitcoin & Ethereum
Allows you time to learn as your investment grows
Doesn’t require an initial lump sum
The downside of Cost Averaging
Works best when pursued through a Bear Market
Recurring purchases will incur more transaction/trading fees
Requires patience & discipline as takes time to build a meaningful position
Doesn’t guarantee success
Cost Averaging isn’t a magic bullet for successful crypto investing, but it is the most sensible approach for someone without experience and with modest discretionary income. It is a really good idea to build a Cost Averaging tracker - in excel or googlesheets - to both give you a clear picture of your profit and loss, as well as keep you grounded.
Over time, a Cost Averaging approach can be modified as you build up your knowledge and experience, using external data to adjust the size of each purchase, and can also be reversed to sell fixed amounts at regular intervals, if and when your patience pays off.
Use Cold Storage to avoid the temptation to impulse trade
Warren Buffet, one of the world’s richest men, and most famed investors, once said: ‘The stock market is a device for transferring money from the impatient to the patient’.
This is equally true of investing in cryptocurrency, which is one reason why Cost Averaging is sensible for inexperienced investors, because it enforces a level of self-control.
If however, you leave your funds on the exchange you use to facilitate the recurring purchases, you could be tempted to abandon your plan when the rollercoaster ride is at its most extreme, trying to catch a short term spike, or bail out when price plummets.
Those are the moments when your patience will be tested to the max, and it helps if you take an out of sight, out of mind approach, by moving your funds after each recurring purchase into what is known as Cold Storage.
Cold Storage means placing your crypto assets in a completely offline state, safe from any malicious online threats, but with the additional benefit of making it less likely that you’ll make a hasty trading decision.
The recommended form of Cold Storage is a cryptocurrency hardware wallet, which is what NGRAVE manufactures, so we have a huge amount of additional resources to help you understand their benefits and function.
This moves us on from the simple and sensible ways for newcomers to manage and mitigate the financial risk elements of investing in crypto - that might see it decline in value - to keeping that investment secure from threats that might simply try to steal it.
Understand the nature of crypto custody
With such an emphasis on security, you can be forgiven for thinking that crypto is a Mad Max style lawless wasteland. It isn’t. Illicit activities have been estimated to account for less than 1% of all crypto transactions, but the threat is real.
Just as you should research the fundamentals of crypto to appreciate its potential future adoption and value, the best way to ensure the security of your personal funds, is taking time to understand how crypto works, and in particular, the concept of custody.
Banks custody your fiat money; they look after it, and grant your privileged access. This trust-based relationship is at the core of modern centralised money, and what crypto - with a decentralised model - was created to fix.
The NGRAVE Academy is a great place to learn more about this, but it boils down to one key phrase: Not your keys, not your coins. This means that the safest way to store your crypto is by being in possession of the information that ultimately enables it to be spent - Private Keys, represented in most modern crypto wallets by a Seed; a collection of 12-24 unique words.
The ultimate way of exercising that control in a secure and convenient way, is by using a crypto hardware wallet like the NGRAVE ZERO.
When you purchase crypto from an exchange - for example through the recommended Cost Averaging approach - they have custody of your Private Keys and therefore your funds. This is known as counterparty risk, as a third party - and any of its security weaknesses - becomes the point of failure, not you, but unlike the funds held in custody by your bank, exchange balances aren’t insured.
Learn more about crypto security with these five essential tips
Banks Insure Funds, Exchanges Don’t
Traditional money functions with a trust model. That trust extends to regulation and compliance, which includes measures to compensate for theft of funds, up to a maximum amount, depending on your location.
This isn’t the case with custodial crypto services - like exchanges or wallets. There is no safety net. Some exchanges maintain an insurance fund, to cover losses from hacks, but that isn’t compulsory. Your funds might be at risk.
There is no such thing as a free lunch, so you will have to accept the risks associated with investing in crypto. There are certainly things you can do to minimise that risk. We’ve tried to introduce you to the most obvious and practical way to safely get started investing in crypto. But that is just the start of an ongoing journey of education and awareness that you should continue to make, in order to stay safe, as you look to grow your crypto investment.